Inflation Index Bond

Deutsche Mutual Fund was the first fund house to launch Inflation Indexed Bond Fund in January. After Deutsche, Axis and SBI are also planning to launch Inflation Indexed Bond Funds. Both Axis and SBI have filed offer documents with SEBI to launch Inflation Index Funds. Distributors feel that more fund houses may join the race to launch such funds. Benchmarked against CRISIL Liquid Fund Index, these funds aim to provide investors inflation adjusted returns. These funds invest a minimum of 70% of assets in Inflation Index instruments and a maximum of 30% in debt and money market instruments. Investors can invest in a minimum of Rs. 5000 in these funds. Deutsche was the first fund house to launch Inflation Indexed Bond Fund in January 2014. The fund collected Rs. 27 crore during its NFO.  As the name suggests, the scheme invests a minimum of 70% of its corpus in Inflation Indexed Bonds (IIB) issued by the government. IIB have their coupon and principal linked to inflation as measured by Wholesale Price Index (WPI) and a tenor of 10 years. Such instruments are being issued every month since June 2013. We spoke to some experts to find out if these funds make good investment opportunity. Suresh Sadagopan of Ladder7 Financial Advisories feels that Inflation Index Bond Funds are more tax efficient. “If you hold it more than one year then the returns will be treated as capital gains through the mutual fund route. If you invest directly in Inflation bonds then then you have to pay tax as per your income tax slab. So investing through mutual fund route is more tax efficient. You also get liquidity.” Nikhil Kothari of Etica Wealth Management says that investors who are purely looking to hedge against inflation can invest in these bonds. “Inflation Index bonds are available at discount - Rs. 82 currently. So there is room for getting capital gains. If more fund houses come up with such funds then there is a possibility that the demand for these bonds will go up which will lead to increase in the price of the bond. Investors falling in the 30% tax bracket with a 3-4 year time horizon can consider investing in these funds. If you compare these bonds to tax-free bonds, tax-free bonds can provide capital appreciation when interest rates fall which is not the case with Inflation Index Bond funds. The returns in tax-free bonds are fixed whereas the returns from these funds can vary depending on the rate of inflation.” Hemant Rustagi of Wise Invest Advisors says “Inflation Index funds have not caught the fancy of investors yet. The funds may beat inflation at a gross level but after paying expense ratio and tax the returns would be less. The returns could go down as inflation falls. Investing through mutual fund route is better because you don’t have to lock in money for ten years. Tax free bonds may look attractive but there is no compounding benefit.  Vishal Dhawan of Plan Ahead Wealth Advisors feels that inflation index funds can offer better returns as compared to tax-free bonds if interest rates continue to go up. “These funds are being ignored because of the high yield offered by tax-free bonds. Inflation Index Fund is a much more tax efficient way of investing in these bonds than investing directly. For more detail and any other query related investment, you can contact me through my email. Warm regards, Arvind Trivedi Certified Financial Planner arvind.trivedi79@gmail.com www.artofinvest.com www.arvindtrivedicfp.blogspot.in (The above article from cafemutual website)